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Producing through recession

By Kayode Adeoye   |   15 February 2017   |   9:58 am

PHOTO:AFP

Production of crude oil and subsequent storage happens only after a well has been drilled and completed where a profitable accumulation of the black gold has been found. These are the times of unfriendly operating environment in the Oil and Gas industry arising from a serious price crash that has lasted for over two years now, times of uncertainty and times of trial, times when the big players are playing small and the small players can play big. It is in view of this that the business of oil exploration, exploitation and subsequent supply is not enough motivation both for the marginal field operators and the oil majors, not only in Nigeria but the world over. DrillBytes in its edition of 16th September 2015 advised that these are certainly trying times for the industry but global best practices shouldn’t be on trial.

In that of 30th September 2015, innovative cost saving technology from some drilling rigs companies both within and without Nigeria was highlighted. In the edition of 14th October, 2015, DrillBytes discussed the opportunity cost of drilling while reiterating the promise made by the Federal Government of Nigeria to secure enough money to pay accumulated cash calls of over $7B to its joint venturers. DrillBytes also discussed the Casing-Drilling technology as another window of pruning down oil production costs and attendant overheads. All of these editions appeared exclusively in the Guardian Newspapers and were done to inform stakeholders of the reasons why production can still go on in spite of the tempestuous operational environment.


Nigeria, as a country is one that pays scant attention to corporate savings but rather spends as if tomorrow will never come and on mostly unproductive wants rather than productive needs and when the rain comes, it is always beaten roundly and soundly to a state of animated stupor or collective amnesia and corporate myopia! Nigeria’s oil industry is responsible for over 70% of the country’s revenue base, employs a tiny fraction of the population and therefore contributes minimally to the country’s Gross Domestic Product, GDP.

The ruling class, over the years, are so engrossed with how to spend rather than save the accruing petrodollars for which they have always succeeded in outdoing themselves until the price crash. Now, the eyes of everyone are suddenly open with business unusual being the sing-song of government at the local, state and federal levels. The industry has sacked almost 60%, on the average of salaried members of staff with those that survived retrenchment being kept on half salaries. Over 60% of contractors have had their contracts outrightly cancelled with others surviving on downward review rates. It is a turnover that has further weakened the economy of the country. As if the times are not bad enough, the Federal Government of Nigeria through the Nigerian National Petroleum Corporation, NNPC is owing to its joint venturers accumulated cash calls of over $7B! These are equity contribution of the NNPC over the years to fund their partnership with the various oil companies. In a nutshell, the oil companies for some time have been funding their joint operations with the NNPC alone.

All over the world, the industry is suffering a recession in activities and therefore a downward slide in drilling and production of crude oil except in the Middle East where the Arabs, rather than drop their rig counts are busy mobilising for more rigs to drill! The Arabs that some consider to be profligate are now showcasing themselves to the world to be frugal and fiscally disciplined much more than several countries in the world, developed countries inclusive. The Arabs knew this day will come and therefore planned by saving massively for the rainy day. The rains are here on a global scale and they are relying on what they have stored to live through the rains while some other countries are being beaten silly! The Arabs are not drilling just to produce crude oil but to be vintage positioned for a future price hike. The idea is to produce as much crude oil as possible under this price crash, sell minimally, store massively to take advantage of a future price hike while others are struggling to drill and produce in a clement operating environment. This, in the opinion of DrillBytes, is one hell of a grand tactical manoeuvre. What is more profitable than drilling to produce oil at a promotional price only to sell at several times over? It is almost impossible to see any other attractive option.


It is with this in view that DrillBytes, in empathy with the oil producing companies, appeals to the NNPC to release the accumulated cash call it is owing operators. It is with this mindset that the column advises marginal operators who cannot go it alone to team up with others, local and foreign companies, to drive their projects and drill to produce oil the Arab way. This is another way of reducing capital flight, attracting investments and minimizing human capital destruction in the country.

It is gratifying that some of these marginal field operators are making giant strides in this regard. Companies like, Consolidated Oil with one jack-up drilling rig, Frontier Oil with one land drilling rig and Sterling Global Oil Company with about three recession-compliant Indian land drilling rigs all drilling at these recessive times. DrillBytes salutes these companies and hopes others will take a cue and do the needful which is drilling and producing oil through this recession!


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